Overview
Subject to satisfying the relevant legislative requirements, individuals may be entitled to deduct financial advice fees from their assessable income under sections 8-1 or 25-5 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).
Tax Determination (TD) 2024/7 sets out the ATO’s views on how these provisions apply to financial advice fees. TD 2024/7 does not apply to individuals carrying on an investment business nor does it apply to fees paid by an SMSF.
Unless otherwise stated, all references to legislation are to the ITAA 1997.
Relevant statutory provisions
The deductibility of financial advice fees is covered by two key sections of the ITAA 1997, namely:
- s 8-1 provides guidance on general expenses; and
- s 25-5 provides guidance on tax-related expenses.
Note that if financial advice fees are deductible under both s 8-1 and s 25-5, they must be claimed only once under the most appropriate section. There must also be sufficient evidence of the expenditure to claim the expense as a deduction, eg, an itemised invoice or fee disclosure statement.
General deductions
Section 8-1(1) broadly provides that an individual can deduct from their assessable income any loss or outgoing to the extent that:
- it is incurred in gaining or producing assessable income; or
- it is necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.
Relevantly, an individual is entitled to a deduction for financial advice fees under s 8-1 to the extent that the loss or outgoing is incurred in ‘gaining or producing assessable income’. This is subject to certain qualifications discussed below.
‘Gaining or producing assessable income’ requires there to be a sufficient connection between the expense and the activities that gain or produce the assessable income. This requires consideration of whether:
- the expense was entirely preliminary to the income-producing activity; and
- there is a delay between incurring the expense and the commencement of that activity.
For example, fees for financial advice incurred regularly and on a recurrent basis for an existing and ongoing income producing investment should be deductible.
Non-deductible expenses
TD 2024/7 also outlines several circumstances in which a deduction is not available under s 8-1. Specifically, an individual cannot claim a deduction to the extent that:
- the expense is of a capital or capital nature — this requires consideration of the advantage sought from the expense, how the advantage will be used, and whether the expense represents a once-and-for-all expense for acquiring something of enduring advantage or a periodical outlay for the use and enjoyment of something over time;
- the expense is of a private or domestic nature — these terms are not defined in the ITAA 1997, but they take their ordinary meanings: ‘private’ refers to personal matters, and ‘domestic’ refers to the home, household, or household affairs;
- the expense is incurred in gaining or producing exempt or non-assessable, non-exempt income; or
- a specific provision of the ITAA 1997 prevents the expense from being deducted.
A deduction can also not be claimed for advice on a proposed investment plan prior to acquiring an asset, but fees can be deducted on a regular or recurring basis to maintain existing income producing investments. Thus, initial advice to establish an investment portfolio may not be deductible but ongoing fees for financial advice to manage the portfolio should be deductible.
Tax-related expenses — s 25-5 ITAA 1997
An individual is entitled to a deduction under s 25-5 to the extent the advice relates to managing their ‘tax affairs’.
‘Tax-affairs’ is defined in s 995-1(1) ITAA 1997 and has been determined to include ‘tax (financial) advice’ as set out in s 90-15 of the Tax Agent Services Act 2009 (Cth).
From 1 January 2022, entities that provide tax (financial) advice services for a fee or other reward must either be a ‘qualified tax relevant provider’ registered with the Australian Securities and Investments Commission or be a tax agent registered with the Tax Practitioners Board and meet the eligibility requirements to provide tax (financial) advice services.
Note that not all financial advice will be considered tax advice, there must be an application or interpretation of the taxation laws to the individuals’ circumstances for the expense to qualify as deductible.
Superannuation-related advice may be considered tax (financial) advice if it relates to strategies involving super contributions, superannuation pensions, SMSF establishment, maintenance or related tax planning advice.
Further, “taxation law” includes legislation which the Commissioner of Taxation has general administration which includes parts of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA) that the Commissioner has general administration of. The Commissioner of Taxation regulates SMSFs and therefore advice in respect of SISA can be tax deductible to the extent that the advice qualifies for a tax deduction under s 8-1 or s 25-5.
Capital expenditure
As noted above, under s 8-1, a deduction is not available to the extent that the expense is capital. A similar preclusions is in s 25-5(4).
Conclusion
TD 2024/7 provides greater clarity in a number of respects compared to the former ATO guidance material. TD 2024/7 confirms that individuals seeking advice in respect of the SISA might be able to claim a deduction, either under s 8-1 if the advice relates to producing assessable income or as tax advice under s 25-5 if it is provided by a ‘qualified tax relevant provider’, tax agent or financial adviser who can provide tax (financial) advice services. However, advice relating to the establishment of an investment portfolio may not be deductible and may be considered to be on capital account.
Naturally, DBA Lawyers would be pleased to assist.
Related articles
- Understanding ECPI for SMSFs
- SMSFs and how the CGT rules work when a pension is in play – Part 1
- SMSFs and how the CGT rules work when a pension is in play — Part 2
- What ATO publications can be relied on?
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).
Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
By Daniel Butler, Director ([email protected]) and Fraser Stead, Lawyer of DBA Lawyers.
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